planned selling activities o Review past expenses and adjust for current plans General and administrative expenses budget

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1 Acct summary: Chapter 1 Private enterprise individuals own businesses that produce and sell services and/or goods for a profit o Service businesses perform services or activities that benefit individuals or business customers o Merchandising businesses purchase goods for resale to their customers e.g. wholesalers or retailers (sell good to final customer) o Manufacturing businesses make their products and then sell these products to their customers. They make their products first and then sell. Remaining solvent means that a business can pay off its debts Business organisations: o Sole proprietorship when one person is the sole investor of capital into the business. Owner assumes personal liability for the debts incurred by the business unlimited liability. Life of business is linked directly to owner limited life. o Partnership a business owned by two or more individuals who each invest capital into the company. To limit disagreements, the partners should always sign a partnership agreement (contract). Joint ownership. Each partner is an agent of the partnership. Unlimited liability applies. Equity net income allocated in split. o Company/corporation separate legal entity that is independent of its owners and run by a board of directors. Continuous life. Shareholders. No personal liability. Must pay income tax. Subject to govt regulation. Financial accounting information vs management accounting information Management = planning, operating and evaluating Planning establishes goals and means of achieving goals benchmarks later used to evaluate. Operating = set of activities that the business engages in to conduct its business according to its plan. Day to day decisions. Evaluating = measures actual operations and progress against standards or benchmarks. Correct deviations from standards and plan future. Internal users = employees etc. Management acct reports budget, cost analysis and cost reports for products/services Budgeting = quantifying managers plans and showing the impact of these plans on the operating activities and financial position Cost analysis determining and evaluating the costs of specific products or activities within a business. Cost reports if actual costs were greater than budgeted why differences occurred and make adjustments For external decision making financial accounting External users people outside the business who need accounting information to decide whether or not to engage in some activity with the business

2 Use GAAP generally accepted accounting principles Basic financial statements Profit/net income = difference between costs and expenses. Solvency long term ability to pay its debts as they come due. Financial statements are accounting reports used to summarise and communicate financial information about a business. o Income statement results of operating activities for a specific time period and profit for that period. o Statement of changes in owner s equity sometimes provided. Changes in owner s investment to explain that part. o Balance sheet summarises financial position on a given date lists assets, liabilities and owner s equity at a given date. o Cash flow statement summarises cash receipts, cash payments and net change in cash for a specific period in time Problem solving recognise and identify problem, identify alternatives, evaluate alternatives, make a decision. Chapter 2 A business plan is an evolving report that describes a business s goals and its current plans for achieving those goals. Both internal and external users use it. It typically includes o Description of the business o Marketing plan o Operating plan o Environmental management plan o Financial plan Purposes: o Helps an entrepreneur to visualise and organise the business and its operations o Serves as a benchmark or standard against which the entrepreneur can later measure the actual performance of a business o Helps to obtain financing as potential investors and creditors will want to know that the business is reliable. Concerned with risk uncertainty of the future operations of the business. Also concerned with return they will receive from their investment. o Description of the business: Info about organisation of the business, product/service, current and potential customers, objectives, where it is located and where it conducts its business. o Marketing plan: shows how the business will make sales and how it will influence and respond to market conditions. Provides evidence of demand including market research, current and expected condition in the market as well as government regulations. How the business will promote, price and distribute its products as well as predicted growth, market share and sales of its products by period. o Operating plan: how the business will develop and enhance its products or services. Relationships between the business, its suppliers and its customers, how it will develop, service, protect and support its products or services. Any other influences on the operation of business.

3 o Environmental Management plan: corporate social responsibility. Aware of environmental and social impacts and account for these costs. Inputs and outputs. o Financial plan: identify business capital requirements and sources of capital and projected financial performance. For a new business includes start- up costs. Capital short term (<year) vs. long term (>year). Projected performance based on historical data or industry averages. CVP analysis: shows how profit will be affected by o Alternative sales volumes, o Selling prices and o Various costs of businesses Activity level referred to as volume (e.g. hours worked, boxes sold) Fixed costs constant in total for a specific time period, not affected by differences in volume during that same time period Relevant range is the range of activity levels over which the particular cost behaviour pattern (fixed) remains valid Variable cost is constant per unit of volume and changes in total in a time period in direct proportion to the change in volume. o Total VC = vx (v = variable cost per unit sold and X = sales volume) Total costs at any volume are the sum of the fixed costs and the variable costs at that volume à TC = FC + VC = FC + vx Profit calculation = revenues expenses The unit sales volume at which a business earns zero profit is called the break- even point. Above the break even point is a profit and below is a loss. The total sales revenue total variable costs are called the contribution margin. The total contribution margin at a given sales volume is the difference between the estimated total sales revenue and the estimated total variable costs. The amount that will contribute to covering the estimated fixed costs. The total contribution margin per unit is the difference between the estimated sales revenue per unit and the estimated variable costs per unit Use CVP to find out 1) how much profit the business will earn at a given unit sales volume 2) how many units the business must sell to break even and 3) how many units the business must sell to earn a given amount of profit Profit (for a given sales volume) = [selling price per unit x unit sales volume] [VC per unit x unit sales volume] TFC To find break even point: o Unit sales volume (to earn zero profit) = TFC/Contribution margin per unit o Profit = [contribution margin per unit x unit sales volume] TFC o TFC = [contribution margin per unit x unit sales volume] o TFC/[contribution margin per unit] = unit sales volume (to earn zero profit To find the unit sales volume to achieve a target profit:

4 o Unit sales volume (to earn desired profit) = [TFC + Desired profit]/contribution margin per unit o Refer to p75 textbook for all equations Chapter 3 Budgeting A budget is a report that gives a financial description of one part of a business planned activities for the budget period Why budget? o Add discipline or order to the planning process o Recognise and avoid potential operating problems o Quantify plans o Create a benchmark for evaluating the business performance Operating cycle o A retail business operating cycle is the average time it takes the business to use cash to buy goods for sale (called inventory) to sell these goods to the customers, and to collect cash from its customers. o A service business operating cycle is the average time it takes the business to use cash to acquire supplies and services, to sell the services to customers and to collect cash from its customers. Can be much longer than retail because some services take a few years. A master budget is a set of interrelated reports showing the relationships among a business goals to be met, activities to be performed during the operating cycle, resources to be used and expected financial results. o Sales budget o Purchases budget o Selling expenses budget o General and administrative expenses budget o Cash budget (projected cash flow statement) o Projected income statement Sales budget o Affects all other budgets o Shows the number of units of inventory that the business expects to sell each month, the related monthly sales revenue, and in which months the business expects to collect cash from these sales. o To estimate future sales, gathers past sales data, industry trends and economic forecasts o Also consider current economic conditions or circumstances that affect the industry o Market analysts and consultants to help o Multiply future sales forecast by unit selling price = monthly expected sales revenue use to determine how much cash/credit it expects to collect each month from sales Purchases budget o Determine best approach for purchasing the needed inventory o Consider costs of keeping money invested in inventory rather than investing somewhere else, storing and handling inventory, paying for insurance and taxes on inventory theft damage and obsolescence.

5 o On the other hand, can be very expensive to not carry enough inventory stockout. Risk alienating customers o The purchases budget shows the purchases (in units) required in each month to make the expected sales (from the sales budget) in that month and to keep inventory at desired levels. It also shows the costs of these purchases and the expected timing and amount of the cash payments for these purchases. o Set desired ending inventory at a constant percentage of following month s budgeted sales or at large enough levels to meet future sales for a specified time. (Have extra available in case estimate isn t correct). o Budget purchases in currency of your own country o Service businesses don t have this Selling expenses budget o Shows the expenses and related cash payments associated with planned selling activities o Review past expenses and adjust for current plans General and administrative expenses budget o Shows the expenses and related cash payments associated with expected activities other than selling o Review past expenses, identify as fixed or variable and adjust to current plans o Service businesses combine selling expenses and general admin budget into general operating expenses budget Cash budget o Make sure there is enough cash on hand to pay for planned operations during current period, have cash buffer on hand, and there is not too much cash on hand o Shows the business expected cash receipts and payments, and how they affect the business cash balance o Can also help external users o Operating activities cash receipts and payments the business expects as a result of its planned operations o Investing activities shows cash payments and receipts expected from planned investing activities o Financing activities shows the cash receipts and payments expected from planned financing activities Projected income statement o Summarises expected revenues and expenses for the budget period, assuming the business follows its plans Chapter 4 Concepts used in accounting Entity concept: an entity is considered to be separate from its owners and from any other businesses, therefore has own accounting system and records Transactions are an exchange of property or service with another entity Source documents are business records used as evidence that a transaction has occurred

6 Monetary unit concept: the source documents for transactions show the value of the exchange in terms of money Historical cost concept states that a business records its transactions based on the dollars exchanged at the time the transaction occurred. Balance sheet: o Assets A business economic resources that will provide future benefits to the business Includes amounts owed by customers to the business (accounts receivable), the right to insurance protection (prepaid insurance) and investments made in other businesses and items o Liabilities The economic obligations (debts) of a business External parties to whom a business owes the debts are referred to as the creditors Liabilities include accounts payable (amounts owed to suppliers for credit purchases), wages and salaries payable (amounts owed to employees for work they have done) and loans payable (amounts owed to financial institutions for money lent to the business o Owner s equity The owner s current investment in the assets of the business Economic resources = claims on economic resources Assets = liabilities + owner s equity Assets = liabilities + owner s capital + net income Dual effect of transactions: a business must make at least two changes in its assets, liabilities or owner s equity when it records each transaction An accounting period is the time span for which a business reports its revenues and expenses A business earning process including purchasing inventory, selling inventory, delivering inventory and collecting and paying cash. A business records revenues during the accounting period in which they are earned and collectable The matching principle states that to determine its net income for the accounting period, a business calculates the expenses involved in earning the revenues of the period and deducts the total expenses from the total revenues earned in that period Going concern = assumes that the entity is able to continue as a viable entity for the foreseeable future Accrual accounting recording revenue and related expense transactions in the same accounting period that it provides goods or services the period in which it earns the revenue End of period adjustments increasing the total expenses to include source documents

Chapter 1. Use accounting vocabulary. Learning Objectives. Objective 1. Accounting and the business environment

Chapter 1. Use accounting vocabulary. Learning Objectives. Objective 1. Accounting and the business environment PowerPoint to accompany Chapter 1 Accounting and the business environment Learning Objectives 1. Use accounting vocabulary 2. Apply accounting concepts and principles 3. Use the accounting equation 4.